saw A. Gary Schilling give a talk recently. he's "Mr. Deflation", had a lot of charts on the subject (the usual suspects). he included an interesting chart comparing the appreciation of a 25yr constant maturity zero T, purchased annually in the early 80s, to the return on the SPX including dividend over the same period. The zero blows away the SPX by a factor of about 6 or so (it's about a 72-bagger). it was an interesting way of looking at it, since most of the charts one sees of bond performance just take a 25yr or 30yr bought once (in which case the return is just the calculated return to par for a zero or the coupon for a regular bond). but i think his is a valid way of looking at it, since the maturity is constant.
in any case, he still seems to like the long bond these days. when asked about the implications of a tanking dollar, i think he didn't give a straight answer, or at least didn't pursue the conclusion sitting at the end of his train of thought. specifically, he said the dollars have to be invested back here (as they are currently recycled), though he pointed out that the path does not need to be direct, which has an influence on the price of credit. in other words, foreigners could buy, e.g., commodities or gold instead of US financial instruments, but then the person who sold the gold has the dollars, and will need to do something with them. eventually the dollar "hot potato" will find its way back here, though the yield required to attract it will vary.
so the conclusion at the end of this train of thought, as i see it, is that a spike in yields caused by a tanking dollar (which lengthens the route via which the foreign-held dollar is recycled [inflating other assets in the process no doubt!]), does not sound very good for long bonds.
his target yield seems to be 3%, reflecting his bearish outlook for economic growth, profit growth and our huge credit bubble. |
